Jennifer Itzkowitz, Seton Hall assistant professor of finance, examines the benefits of appearing at the beginning of the alphabet – especially on the stock market.
Jennifer Itzkowitz joined the Seton Hall faculty in 2009 after earning a Ph.D. in Finance from the University of Florida. Her research examines contemporary problems in corporate finance, banking, and behavioral finance. Professor Itzkowitz’s work has been published in The Research Handbook on International Banking and Governance, Journal of Corporate Finance, and Review of Finance. Jennifer’s research has also been presented at a number of conferences including the annual meetings of the Financial Management Association, Western Finance Association, Midwest Finance Association, European Financial Management Association, and the INFINITI Conference on International Finance. At Seton Hall, she is responsible for the coordination and teaching of the core finance course and teaches a seminar dealing with advanced corporate finance topics.
Alphabetical Stock Benefits
Walking by a store named Triple-A Avocados got me thinking. Were those three A’s at the beginning so the store would appear first in search listings? Like the Yellow Pages?
My research partners and I had some questions, is it possible that capabilities alphabetical order still matters – even with the Internet? And, can it impact something as important as stock market investment? The answers are yes and yes.
We looked at all stocks traded on the New York Stock Exchange, Amex, and Nasdaq from 1985 until 2013 and found that early alphabet stocks are traded significantly more frequently and at higher valuations than later alphabet stocks.
Our findings demonstrate the confluence of two psychological phenomena – status quo bias and satisficing – within the context of the stock market. Stocks are typically listed alphabetically and investors default to this status quo order, even if they can re-sort. Furthermore, they satisfice and choose the first option acceptable to them, even if there are better options later on.
Interestingly, the alphabetical order effect begins in 1999, when online trading became more widespread and investors were inundated with information.
Our results were robust. We controlled for a number of firm and stock characteristics which also affect trading volume. We ruled out other behavioral biases related to how we learn and remember. And, even after removing the 10 most traded stocks, including Apple, we found the same results.
It turns out, investors are not that rational after all. Alphabetical order impacts something as important as the stock market. Given our findings, investors would be wise to approach stock-picking more objectively, by first determining the criteria that matters most to them and then re-sorting the list on that basis before making any selections.